China hospitals, and doctors depending on the funding of their departments and sections, have long relied on profits (the 15% markup for hospitals) from prescribing drugs to patients to cover their operating costs and personal incomes. This is why Zadaxin, an expensive medicine with little risk of adverse reaction by the patient, was the perfect prescription medicine. The more it's prescribed, the greater the profit to the hospital without risk of a bad result to account for. Sort of like the abuse of unnecessary procedures being bilked to insurance companies or whoever can pay in the US. That's all going away now. In a direct quote from the State Council's news release, "The current mechanism whereby doctors can increase personal and hospitals' income by prescribing more medicines must be abolished and efforts made to ensure services are properly priced." The Chinese authorities are very serious about reigning in health care costs for both the hospitals and the patients. With NO profit from Zadaxin, hospitals and physicians no longer have a financial incentive to prescribe it. In fact, they will now have pressure to ensure that the 70-80% cheaper generics are used. Furthermore, it seems that the price SciClone's sole importer will pay for Zadaxin is tied to what price Sinopharm receives from hospital sales. As province tenders, like the recent one in Zhejiang, cut the price to Sinopharm, Sinopharm cuts the price it pays to SciClone. Blobel says he "expects" to change this pricing arrangement, but after putting all the cards in Sinopharm's hand it is hard to see how he will get a higher price out of Sinopharm except with some more major concessions. None of this is good news for SciClone, and they have done a miserable job managing the situation which was evident and publicly discussed by experts like Bain & Company a year ago or more.

Today China's State Council announced that the 15% hospital profit margin on pharmaceuticals will be eliminated at 100 top hospitals now and for all hospitals nationwide by 2017. Blobel's evasive conference call answer that the price reduction in Zhejiang province is "a low double-digit number" is disturbing. Is it 12% or is it 30%? Must be bad if it gets billing in the very first paragraph of the earnings press release. Zhejiang is a rich and populous province (55 million people) bordering Shanghai. Why should we expect other provinces to give Zadaxin a better price? But don't worry. Blobel says the company "expects" to offset the price reduction with even more volume and changes in price arrangements with Sinopharm. I thought the reason Blobel gave Sinopharm exclusivity was for favorable pricing. I guess the price formula isn't so favorable any more. Since SciClone is not allowed to sell to any other importer until the exclusivity deal runs out at the end of 2015, why does Blobel "expect" that Sinopharm will give a higher price? The only legitimate bargaining chip SciClone has is to extend Sinopharm's exclusivity period at less than market prices and further erode SciClone value. On top of that, China's moves make the Angiomax deal dead in the water, except for several more millions the company is obligated to pay to The Medicines Company. Blobel and other officers picked a nice day to bail out more stock. Apparently the stock purchase program is to facilitate such sales.

Here's Bloomberg's article this weekend. http://www.bloomberg.com/news/articles/2015-05-25/foreign-drugmakers-face-more-pressure-to-lower-prices-in-china
Pricing pressure being felt in more provinces. Vice minister for healthcare reform says, "The prices at which we now buy patented drugs and unique drugs are falsely high."

With Theravance's $1.3 million of VIBATIV sales in the U.S. in 1Q2015, VIBATIV is well on the way to break 2014 sales of $4.5 million. Who knows, in SciClone's hands the China sales of VIBATIV, once SciClone pays for whatever trials, regulatory process, etc., in a few years could top $2 million a year. That should compensate rather little for any price reductions on Zadaxin.

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